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There seems to be an accounting identity here : government expenditure = money printed (QE) + money borrowed + money collected in taxes.
The difficulty I have with the claim that money collected in taxes doesn’t fund government spending is that this claim, if true, must also apply to money printed (QE) and money borrowed. So if none of the elements on the right side of the identity fund government spending, then what does?
G = T + ∆B = ∆M to be precise, as I have written it in academic papers
And the answer is that ∆Mg = G
Where ∆Mg = Growss money creation, which does fund government spending
And that
∆Mg – T – ∆B = net money creation which is the net fiscal stimulus
As I have not written it kike this before I think that’s right
I reserve the right to amend it when I have not just had a couple of glasses of wine with supper
If the government first.
1). Issues £10m In gilts, which removes £10m in currency from the economy.
…and then immediately:
2). Issues £10m in currency, and removes £10m of gilts from the economy (QE).
Then, it has done precisely nothing at all. 2 cancels out 1.
The entire thing is an accounting gymnastic to falsely push up that national debt figure (those gilts held by the BoE, are still part of the interest bearing debt they claim at some point must be paid back).
But the or8cess has to start with a spend
That us the only way currency is created
In that case this flow cannot happen
“So if none of the elements on the right side of the identity fund government spending, then what does?”
Nothing does. The concept of funding applies to a currency user. You, me and the local council. Or. everyone but the Government of the UK which is the sole currency issuer. Therefore you need to look at their finances from a different angle.
If a Government levies taxes and accepts its own created currency as payment for those taxes it can use the system it has created to provision itself. If it needs workers or the services of companies, it can pay them in its created currency who need that currency to pay their taxes. Others who do not work directly for Government, but still need to pay their taxes, can supply goods and services to those who do. They will accept the Government’s currency of issue. The requirement for tax paid in the currency of issue creates a value in terms of the goods and services it will buy.
If the government, and others spending the currency, demand too many goods and services then we could have an inflation problem. We might then need a combination of higher taxes, lower government spending and higher interest rates to discourage borrowing. This is all to discourage too much spending rather than raise money per se. However, MMT suggests the first two are used in preference to the latter.
In this way taxes drive money ie create a value for that money and this enables the government to spend. So they allow Govt to spend but “funding it” is a meaningless concept for a currency issuer.
https://neweconomicperspectives.org/2014/05/taxes-mmt-approach.html
Tom
I admit I am not convinced
So what if a government can create its own currency, it is still funding its activities
And money creation has consequences, including the need to Rac and (yes) borrow since no 8ne in MMT has yet explained to me how the real world functions of gilts will be replaced
So there is a funding cycle in MMT, whatever anyone wishes to claim. It’s simply wrong to pretend otherwise.
You can try to give it another name by al, means. Please suggest it
But unless you think G = ∆M (as previously noted), and I guess you don’t then to pretend there is no funding equation is deeply misleading, because there is, albeit it is different to that in neoclassical economics.
I agree it can be a disturbing concept. But let’s suppose, for the sake of argument, that I’m a gangster who runs a protection racket. I can demand, that my ‘clients’ pay me in my own business cards. If they know what is good for them they will have to pay. So they have to work for me to earn the cards by mowing my lawn or fixing my car or whatever. If they earn extra ones they can sell them to my other clients, who also need the cards, or exchange them for goods and services. So, in effect, I’ve used my power to create a parallel currency which will acquire an exchange rate with other currencies like the pound.
So the question is: am I ‘funding’ my own activities in this way? I’ll always be in deficit in terms of my own cards because otherwise there wouldn’t be any cards available in circulation with which my clients can pay my ‘fees’. If I need more spending power I can print extra cards or if I want to be more sophisticated I can borrow the surplus ones back with a promise to pay extra business cards after a period of time.
I know the example – you have borrowed it
You do not answer my question
Let’s talk about a government. What else do you call the process I describe?
Playing games is not an answer
Yes I can’t claim much originality. Warren Mosler tells the same story using his own children as an example. From my own experience I don’t think it would work. No parent could threaten to put them in jail, or worse, if they didn’t pay their taxes. I altered it to make it slightly more realistic. At least IMO.
You’re looking for an alternative to the word ‘funding’? Vocabulary is a big difficulty with MMT. We are conditioned to think of economics from our own experience. We don’t want to run deficits or be in debt ourselves, but we understand why it has to be different for government so we look for a more appropriate terminology. It is always less convincing than we’d like it to be.
So maybe “provisioning”? I wish I could think of better term so this is just another example of the difficulty of language. The government are provisioning themselves, and also society as whole using the real resources which are available to them. So they, hopefully, are slightly more benevolent than our hypothetical gangster, but the underlying principle is the same.
Money is funding
The government creates money
So it is funding itself
I don’t get the problem with that
In fact, because it’s true it’s really unimportant to say it, rather than deny it
Yes does need to be said time and time again – with or with out alcohol – moderately that it is!
Interestingly (I follow the theme in USA blogs/media) I noted this in a Mises Inst ‘blog’:
“Culbreath’s case for modern monetary theory (MMT) rests on an ignorance of basic economic principles regarding the role of money in a free market economy. Money–whether precious metals, fiat currency, crypto, or some other good–is more than the unit of account that makes exchange possible. Money is also a key part of the equation of the price system, which allows market participants to discover the highest use of goods and services as determined by the demonstrated preferences (i.e., what they willing to spend their money on) of consumers, investors, workers, and business owners. A freely functioning price system and a stable currency are thus the key to a proper functioning market”
https://mises.org/wire/no-conservatives-should-not-embrace-mmt
MMT is intent on delivering a stable currency.
The ignorance is that of the commentator who does not appreciate this
Floating rates actually help deliver this outcome
The question I ask when this issue is raised is one I think Richard raised some time ago. If I was a country with a new currency (Scotland in my dreams) how could I tax before I had first put the money required to tax into the economy by spending?
A soundbite is needed that is as snappy as “it’s tax payers money”. For example, on the radio this morning they were talking about the Manchester United pitch invasion, and someone used the phrase “tax payers money” to refer to what would be increased policing costs to stop pitch invasions if they were asked to do so (it is currently the grounds responsibility to manage access).
Like “Get Brexit Done”, it is a simple and “obvious” soundbite that people intuitively (but mistakenly) understand.
The public purse
I may have this wrong, but I understood that a local police force decides what level of presence is required to ensure safety at a football match, and the home football club is required pay for the increased resource (overtime, etc).
You are right
Richard
Am I right to expand your comment ” leave the money owing to the banking system ” by adding for my own understanding
i.e. buying back the gilts it’s already “sold “/ exchanged from the private sector savings ?
Feel free to have a quick slurp before getting back
Cheers
No, the money is left outstanding on the central bank reserve accounts that are technically the balance owed by the Bank of England to the private banks
This is true whether QE or MMT principles are followed. These balances have still to exist because they are the consequence of government spending money into the economy with all money being debt